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Why Is Lilly (LLY) Down 3.7% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Eli Lilly (LLY). Shares have lost about 3.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Lilly due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Lilly Q2 Earnings Top Estimates, Sales Lag

Lilly reported second-quarter 2020 adjusted earnings per share of $1.89, which comprehensively beat the Zacks Consensus Estimate of $1.58. Earnings rose 26% year over year boosted by higher other income and lower SG&A costs.

Revenues of $5.50 billion missed the Zacks Consensus Estimate of $5.62 billion. Sales decreased 2% year over year as volume increases were offset by the impact of lower realized prices of several of its drugs. Lower realized prices had a negative impact of 7% on sales. Volumes rose 6%. Foreign exchange had a negative impact of 1% on revenue growth this quarter.

Reduction in new prescription trends (as fewer patients visited a doctor) hurt the top line in the second quarter by approximately $250 million Coronavirus-related stockpiling benefits, which increased sales of medicines like diabetes medicine, Trulicity and psoriasis medicine, Taltz in the first quarter reversed in the second quarter and hurt total revenues by another $250 million.

Lilly said that the number of patient visits to doctors declined to roughly 50% of pre-COVID-19 levels with a peak impact in late April and May. However, trends improved through a combination of Telehealth and in-person visits, as patient visits were back to 85% of pre-COVID-19 levels in June.

Meanwhile, generic erosion of Forteo and Cialis and increased competitive pressure also hurt the top line.

Quarter in Detail

Key growth products (products launched since 2014) drove 9% of revenue growth and 12% of volume growth and represented nearly 54% total revenues, up from 51% in the previous quarter.

U.S. revenues declined 3% to $3.15 billion while ex-U.S. revenues declined 1% to $2.36 billion.
    
Among the established products, Forteo sales declined 30% to $252.7 million. Humalog sales dropped 18% to $555.1 million. Humulin sales declined 3% to $313.6 million. Alimta sales declined 7% to $539.1 million.

Among the growth products, Trulicity generated revenues of $1.23 billion, up 20% year over year driven by higher volumes, which offset the impact of lower realized prices. The lower realized prices were a result of higher contracted rebates and changes in segment mix.

Cyramza revenues were $256.7 million, up 6% year over year primarily driven by higher realized prices and increased demand in the United States and higher volumes in ex-U.S. markets.

Jardiance sales rose 13% to $262.0 million driven by increased demand trends within the SGLT2 class of diabetes medicines in the United States and increased volume outside the United States.

Basaglar recorded revenues of $290.4 million, flat year over year as higher sales in ex-U.S. market offset the impact of lower U.S. revenues.

Taltz brought in sales of $395.2 million, up 12% year over year as U.S. sales gained from higher demand, which offset the impact of lower realized prices. Ex-U.S. sales were driven by increased volume, which offset the impact of lower realized prices.

Olumiant generated sales of $145.0 million in the quarter compared with $139.7 million in the previous quarter, backed by increased volume in international markets. Revenues outside the United States were $131.8 million compared with $128.4 million in the previous quarter.

Verzenio generated sales of $208.6 million in the quarter, up 56% driven by increased demand in U.S. markets.

Emgality generated revenues of $87.4 million in the quarter compared with $74.0 million in the previous quarter.

Newly launched product, Baqsimi generated sales of $13.6 million in the quarter compared with $17.8 million in the previous quarter.

Retevmo, launched in the second quarter, generated sales of $6.3 million in the second quarter.

Gross Margin & Operating Income

Adjusted gross margin was 79.6% in the quarter, down 140 basis points primarily due to the impact of lower realized prices on revenues.

Operating income declined 2% year over year to $1.54 billion due to lower revenues, which offset the benefit from lower SG&A costs.

Operating margin was 28% in the quarter, down 110 bps year over year.

Marketing, selling and administrative expenses declined 9% billion due to reduced marketing and travel meeting expenses. R&D expense declined 1% in the quarter due to pause in clinical studies, which has shifted the timing of the expenses to the second half of the year.

Adjusted effective tax rate was 13.4%, higher than 10% in the year-ago quarter.

2020 Guidance

The company raised its earnings guidance for the year due to expectations of higher other income and lower SG&A costs while keeping its sales guidance intact.
 
Lilly upped its 2020 adjusted earnings guidance from a range of $6.70-$6.90 to $7.20-$7.40. The revised earnings guidance indicates year-over-year growth in the range of 19% to 23%.

However, the 2020 revenue guidance was maintained in the range of $23.7 billion-$24.2 billion. Gross margin is expected to be approximately 80% (previously approximately 81%). Adjusted tax rate is expected to be approximately 14% (previously 15%). Adjusted operating margin is expected to be 31% in 2020 (maintained).

Marketing, selling and administrative expense guidance was lowered from a range of $6.2 to $6.4 billion to $6.0 to $6.2 billion, reflecting cost savings from travel and promotional activities. Research and development expense is still expected to be in the range of $5.6 billion to $5.9 billion.

Lilly expects improvement in new prescription volume trends for its key products in the second half of 2020, which it expects will cross pre-pandemic levels by the fourth quarter. It still expects revenue growth to be driven by higher demand for its growth drugs including Trulicity, Taltz, Basaglar, Jardiance, Verzenio, Cyramza, Olumiant, Emgality, Baqsimi as well as potential revenues from new product launches. However, generic competition for several drugs, rising pricing pressure in the United States due to rebates and legislated increases in Medicare Part D cost sharing, price reductions from increased utilization of patient affordability programs, and price cuts in some international markets like China, Japan and Europe are some top-line headwinds expected in 2020. In the United States, prices are now expected to decline in a mid-single digit range versus prior expectation of low-single digit range.

Lilly has resumed enrolment in the majority of existing clinical studies (with the exception of mirikizumab for Crohn's disease and ulcerative colitis), as well as initiated new clinical studies after pausing them in the first quarter. As a result, it expects R&D costs to rise in the second half of 2020 as it resumed the clinical trial starts and enrolment activity in the second quarter.

Lilly anticipates rising unemployment to result in increased utilization of Medicaid versus commercial insurance, which will be a moderate headwind to revenue growth in 2021 of approximately $200 million

Coronavirus Related Research Efforts

In June, the first patient was dosed in a phase III study to evaluate Olumiant (baricitinib) as a potential treatment for hospitalized patients diagnosed with COVID-19. The study will complement an already ongoing study of Olumiant with Gilead’s remdesivir being conducted by the National Institute of Allergy and Infectious Diseases (NIAID), part of the National Institutes of Health (NIH) for hospitalized patients with COVID-19 infections.

Lilly is developing an antibody therapy candidate, LYCoV555 in collaboration with AbCellera. The company has completed dosing of a phase I study and has initiated a phase II study on the candidate. Lilly also has a separate collaboration with China-based Junshi Biosciences to co-develop therapeutic antibodies for COVID-19. The companies have completed dosing in a phase I study on LY-CoV016, the lead antibody from the collaboration.

Lilly is also conducting a phase II study of an antibody that targets Angiopoietin 2, which has been observed to be elevated in COVID-19 patients with acute respiratory distress syndrome or ARDS.

How Have Estimates Been Moving Since Then?

It turns out, estimates review flatlined during the past month.

VGM Scores

At this time, Lilly has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Lilly has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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